June 16, 2007 (LPAC)--Private equity and hedge funds pondering going public to benefit from a federal tax loophole in the Internal Revenue Code, may have to think again, if a bill introduced into the Senate Finance Committee on June 14 is passed. Senate Bill 1624, sponsored by Senators Max Baucus (D-MT) and Charles Grassley (R-IA) would require such funds to be taxed at the corporate level of 35% instead of the 15% enjoyed by public partnerships deriving 90% or more of their income from passive investments (rents, royalties, dividends, interest, sale of capital gains).

According to Senator Baucus, in his remarks introducing the bill: "This year, some private equity and hedge fund management firms are attempting to qualify for partnership tax treatment. They seek to do so even though they derive virtually all of their income from providing asset management and financial advisory services. These management firms argue that they are able to achieve this result by claiming that all of their income from asset management and investment advisory services is passive. But objective observers would say that this income actually arises from active businesses. Congress's intent in 1987 was to treat such publicly traded partnerships as corporations. In the legislation that we introduce today, we seek to ensure that Congress's original intent is carried out."

While the highly technical language in the bill does not mention private equity funds, or hedge funds, which are well-known internationally as "locust funds," Sen. Baucus' introductory statement hits its mark, and cheerleaders for the private equity/hedge funds are gearing up to stop the bill.